The Value of Biodiversity as an Insurance Device

Abstract

This paper presents a benchmark stochastic endogenous growth model of an agricultural economy. Producing food requires land, and increasing the share of total land devoted to farming mechanically reduces the share of land devoted to biodiversity conservation. However, safeguarding a greater number of species guarantees, through spatial exchanges, better ecosystem services which, in turn, ensure lower volatility of agricultural productivity. The optimal conversion/conservation rule is explicitly characterized, as well as the total value of biodiversity in terms of the welfare gain from biodiversity conservation, and the marginal value of biodiversity in terms of risk premium reduction, namely its insurance value. The Epstein-Zin-Weil specification of preferences allows us to disentangle the effects of risk aversion and aversion to fluctuations.